The Path to Marijuana Legalization in Canada

Follow up to The Path to Marijuana Legalization in the United States

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Tuesday, January 06, 2015

By Todd Davis, CEO of Endexx Corp.

In 2013 Health Canada introduced the Marihuana for Medical Purpose Regulations (MMPR) that came into effect on April 1st 2014, repealing the Marihuana Medical Access Regulations (MMAR) that had been introduced and adopted nationwide since 2001. (http://www.hc-sc.gc.ca/dhp-mps/marihuana/index-eng.php)

MMAR allowed medical marijuana patients to either grow their own, designate someone to grow for them or purchase directly from Health Canada. As of December 2013, there were 37,400 registered medical users and 4,200 licensed growers allowed to produce for a maximum of 2 patients each. Under the old system, Health Canada estimated over 3 million plants were cultivated in Canada in 2013, capable of producing 420,000 pounds of marijuana. This works out to 14 grams per user per day, or up to 20 joints per day per patient, raising obvious concerns about “diversions” into the black market.

The new MMPR no longer allowed personal production and instead introduced a system of centralized federally licensed commercial producers selling directly to registered medical patients. To date, Health Canada has approved 15 licensed producers to grow and sell medical marijuana under the new system and 8 companies that are only authorized to produce. (http://www.hc-sc.gc.ca/dhp-mps/marihuana/info/list-eng.php) As of October 2014, Health Canada had received over 1,000 applications. Nearly 700 of them were either rejected or withdrawn, leaving 300 applicants to compete for a chance to participate in an already very crowded market.

At the outset, MMPR encountered fierce opposition from medical patients and industry advocates who challenged Health Canada in court and won an interim injunction in late March 2014, days before MMPR came into effect, allowing registered growers and users to keep operating under the old rules. On December 15, 2014, the Federal Court of Appeals upheld the injunction and the trial is now set for February 23, 2015. (http://cannabisincanada.ca/files/8314/1868/0260/A-174-14_20141215_Judgment.pdf)

Health Canada, meanwhile, as MMPR was coming into effect, predicted an initial shortage of supply as very few producers who were issued licenses late in the process under the new system were ready to meet the projected demand, and stockpiled 500 kilos of dried marijuana and imported another 100 kilos from the Netherlands. It also granted production licenses for amounts well in excess of the producers’ capacity and has since adjusted the authorized production limits of each producer to reflect the scope of their permitted facilities, while also closely monitoring enrollment and demand levels.

Health Canada also predicted that the medical marijuana market would grow to 450,000 patients and become a $1.3 billion dollar industry by 2024, based on market surveys and observing the rapid growth rate in enrollment under the old program. Health Canada further suggested pricing levels at the start of the program of $7.60 per gram, compared with MMAR prices as low as $2.00 per gram.

All new licensees and license renewals for growers and patients alike are processed and registered under MMPR, leading to a steady migration of patients and operators from the old to the new system. By early December 2014, nearly 14,000 patients had registered with the new licensed producers, up from 6,600 in May and 9,450 in August (http://blog.liftcannabis.ca/). By some estimates, enrollment growth rate is projected to average 10% per month over the next 12 months, (http://mmjpr.ca/industry-insight-medical-marijuana-canada/) and by that measure, a total of 45,000 medical patients are expected to be on the MMPR program by December 2015.

Based on incomplete information available from licensed companies’ websites and various news sources, licensed producers under MMPR collectively produce today about 25,000 pounds of marijuana per year. It is worth noting that Tweed (http://www.tweed.com/), the largest licensed producer in Canada with a cultivation capacity of 558,000 square feet, was initially permitted in January to grow 33,000 pounds per year. When its license was renewed in November, the permitted amount was reduced to 7,700 pounds. Other producers operate at as low as 20% of their cultivation capacity, underscoring the near tem ability of current license holders to meet and exceed projected demand growth for the foreseeable future, without Health Canada in theory needing to approve a single additional license.

Health Canada has been closely monitoring grow facilities and program enrollment to strike a balance and create a controlled market that has the flexibility to adjust itself and accurately mirror supply and demand almost in real time. The total cultivation allowance of 25,000 pounds equates at current enrollment levels to 2.2 grams per patient per day. Allowing for inventory and margin of safety, compared with the estimated 14 grams per patient per day under the old system, one can conclude that Health Canada has succeeded in creating an efficient infrastructure and control mechanism through adequate regulations and oversight. Health Canada has also been actively enforcing the new regulations, conducting frequent random checks, initiating product recalls and issuing warning letters to companies that are not in compliance. Currently, an astonishing 14 out of a total of 22 companies are listed on Health Canada’s website as being out of compliance.

Licensed producers are making a push to grab market share and increase production capacity, leaving little room for competition to grow beyond the scope of what has already been established and permitted, and naturally putting into question the fate of the hundreds of applicants who have poured significant resources into building legitimate assets and are still vying for the coveted price of one day obtaining a license.

Those fortunate enough to enjoy the benefits of being “first to market” are attracting large amounts of capital through IPOs and private offerings. This year alone, six Canadian medical marijuana companies having direct stakes in licensed producers have been listed on the Toronto stock exchange, with a composite market capitalization of $216 million. PharmaCan, (http://pharmacancapital.com/) a company with interests in a portfolio of licensed producers, will join the exchange next week. Over the next 12 months, based on a retail price of $7.50 per gram, and assuming all permitted capacity is sold, licensed producers will generate an estimated $85 million in direct revenue.

Looking forward, how likely is the new program to generate the predicted $1.3 billion in revenue by 2024 when prices are destined to decline as capacity expands and competition among the dominant players becomes fiercer? The answer is very likely. To meet the target, all it will take is a constant growth rate of 3.00% per month (compared with the 10% monthly growth rate predicted for the short term), after factoring in annual erosion in retail prices of 5%.

The eventual outcome of the legal challenges that MMPR still face is hardly a wild card. MMPR is here to stay. Growers and patients under the old system have steadily shifted into the new and pricing pressures due to a healthy competition from producers have resulted in improved purchasing power, alleviating the major source of concern for those opposing MMPR. A dual system will not be able to coexist for long and a highly regulated market will prevail while Health Canada will need to shift its focus from controlling production to creating a new regulatory environment that allows alternative delivery systems, promotes a more flexible approach to the way patients access their medicine, and encourages research and clinical trials in an effort to bridge the disconnect with the medical establishment, …until a less conservative government takes on the issue of outright legalization.

Editor's Note / Todd Davis Bio:Education: Northern Arizona University Bachelor of Science - Administrative Communications. CEO Endexx Corporation 1993-present. Investment Banker/Stock Broker 1990-2000. CEO/Consultant for multiple Small Cap companies 2000-Present. Developer/ Analyst Pro17 market and stock forecast model 2008-Present. As a Broker, Consultant and CEO Todd has participated in and managed/structured over 100 IPO’s, private placements and convertible debentures raising in excess of 100 million in the Small and Micro Cap arena over the last 22 years.